Sales Tax Law
Sales tax is a form of tax that is added to the purchase of retail goods and services. Sales taxes are primarily administered by state and local governments and are applied to a wide range of items, from clothing to home goods to car parts. Sales taxes can vary widely by state, resulting in different overall costs for items depending on the city or municipality where they are purchased.
Administration of Sales Tax
Sales tax is placed on goods at the time of purchase. Although customers pay sales tax, it is collected by the businesses that sell the goods, and they must report the tax to the Internal Revenue Service. The federal government does not administer sales tax; rather it is determined by state and local governments. Currently forty-five states have a sales tax. Only Alaska, Delaware, Montana, New Hampshire, and Oregon do not. Most state sales taxes are general in nature, meaning that they apply to the sale of most goods, but states also have the option to impose additional selective sales taxes on the sale of particular items.
California currently has the highest state sales tax in the country, at 7.25 percent. However, many localities may charge a higher local sales tax than this, varying from one percent to as high as ten percent.
What Can Be Subject to a Sales Tax?
Not all goods and services are taxed by sales taxes. Additionally, not all types of transfers of goods are taxable. Real property, such as land, is not subject to the sales tax, nor are large bulk sales such as the sale of an entire business or operation. In many states, while food sold in restaurants or in grocery stores for immediate consumption, such as an on-site café, are subject to sales tax, food purchased in a grocery store that will be consumed at home are not subject to the same tax.
Additionally, goods sold for retail are to be taxed only once. This means that those who buy and re-sell typically are not required to pay sales tax on their initial purchase, as the tax will be paid by the consumer who ultimately buys the good. Likewise, in many cases, where parts are purchased for manufacturing to be made into one larger item, these parts are often exempt from sales tax, although the ultimate good that they create is not. Finally, items sold by charities or other exempt organizations are generally also exempt from the sales tax.
Sales Tax and Multi-State Sellers
One unique issue that arises with sales tax is its applicability to retailers or other entities that sell in multiple states or who have only a small presence in a state. Until relatively recently, states could only require out-of-state sellers to collect and remit sales taxes if the seller had a sufficient presence in the state such that it could be said to have a nexus with the state. This could include the presence of a physical store, advertising in the state, or other substantial connections.
However, in the 2018 case of South Dakota v. Wayfair, Inc., the U.S. Supreme Court ruled that states have the power to require that out-of-state sellers engaging in a certain amount of business in the state collect and remit sales tax, regardless of whether they meet the physical presence test. The case arose after South Dakota passed a law requiring some sellers without a physical presence in the state to collect and remit sales tax, citing the fact that the state was losing state revenue as internet sales increased. Many states have since passed similar laws requiring out-of-state sellers who meet specific sales or transaction thresholds to collect and remit sales tax.
